Since its brush with death during the 2008 global financial crisis, much of the banking sector has returned to achieve record profitability. The FDIC recently reported that commercial banks and savings institutions grew profit in the fourth quarter of 2012 by 37% over the same quarter a year before.
Cross-selling remains a largely untapped revenue source in most banks.
Yet operating revenue is improving at a much more modest 4.5%. This is no surprise. Banks face thin spreads between the rate they pay for deposits and what they earn on loans, as well as increasing regulatory restrictions on the fees they charge, so revenue is difficult to come by. But there is one significant opportunity to grow operating revenue: effective cross-selling.
Cross-selling remains a largely untapped revenue source in most banks. Though many have talked a good game, few banks have made a disciplined effort to do cross-selling well -- or even to do it at all. This two-part series explains how banks can make cross-selling a central part of their customer strategy.
Selling more to existing customers
At its heart, banking is a simple business. Banks create revenue through interest rate spread or through fee income. The only sustainable way to increase revenue is by adding new customers or by deepening relationships with existing customers. Attracting new customers is difficult, especially in markets that are stagnant or shrinking. That leaves one clear opportunity for growth: sell more to the customers the bank already has.
When we total up checking accounts, investments, savings accounts, loans, and insurance, it's easy to see how a customer -- even in a developing country -- could use as many as a dozen or more financial services products. Yet banks do a poor job of selling more than two or three of these products to a customer. Only the very best practitioners sell more than four.
A bank's cross-selling ratio is the number of products and services banking customers use divided by the number of the bank's customers. The key to boosting this ratio is to accelerate the rate at which the bank presents and sells financial solutions to its customers. In the end, this is the only meaningful measure of success. As the pace of sales increases, the revenue opportunity gap closes and the bank's revenue rises. It's a straightforward process -- one best accomplished in two phases.
Phase one: Laying the foundation
1. Define and measure cross-selling. Before a bank can get serious about measuring its cross-selling performance, it has to define the term. There are no industry standards or definitions of product or customer. It is important to remember this, especially when bank executives attempt to compare cross-selling rates among banks. Because the measure has no standards, cross-bank comparisons are meaningless.
So the bank must develop its own definitions of a customer and a product. This isn't as clear-cut as it seems. For instance, if a customer uses the Internet to bank, is he using a product, or is he using a service channel? If the Internet doesn't count as a product for cross-selling purposes, does using the Internet to pay bills count? And what about customers themselves? Do all retail customers count? What about small-business customers? Does a small-business owner count twice -- once as a retail customer and once as a business?
There isn't one correct answer, so each bank will have a different definition. Nevertheless, a bank must arrive at a clear definition that can guide its measurement.
2. Analyze the drivers of cross-selling. Once the bank has a method to measure cross-selling, it can look at its cross-selling trend over time. If its cross-selling ratio is going up, the strategy is working and doesn't need any short-term interventions. Most banks, however, will find that cross-selling is static or perhaps even going down.
A cross-selling trend is determined by four factors:
- new customer acquisition: the number of new customers the bank adds during a specific time period
- new customer cross-selling: the initial number of financial products the bank provides to these customers at the start of the banking relationship
- existing customer attrition: the number of existing customers who leave the bank during a specific time period
- existing customer cross-selling: the number of additional financial products the bank sells to customers who were with the bank before the time period being measured
Most companies that measure cross-selling can readily produce reports on all of these factors, but few look at the cross-selling trend -- and fewer still figure out what's causing it. Those that do this kind of analysis have a much better understanding of their cross-selling performance.
In my experience, driver analysis is vital because it eliminates much of the mystery surrounding cross-selling and how to improve it. It will show what's influencing the current trend, and this in turn will suggest the interventions that are needed.
3. Link the bank's cross-selling efforts to its vision and values. At Gallup, we know employee engagement is related to the feeling that the mission or purpose of your organization makes you -- and your employees -- feel your job is important. People want to believe that their job matters. Banks that deepen relationships just to drive profit may be missing a key profit driver -- employee engagement. When employees feel they do important work by helping customers reach financial goals or by improving their communities, they're more likely to be more engaged, and the bank's revenue is more likely to improve as a result.
When a bank carefully ties its mission and purpose to its front-line staff's activities, magic happens. When it doesn't, performance improvement initiatives are hard to sustain. Cross-selling for cross-selling's sake is not enough. Linking vision and value helps the bank think through its cross-selling strategy and how to communicate it to the front-line team.
4. Determine the metrics that accurately reflect front-line employees' performance. Most banks will admit that their front-line employee performance metrics need work. Banks tend to add new metrics over time, and they seldom remove any. But Gallup's research into employee engagement shows that it's essential for employees to know what is expected of them at work. Murky performance measures make it difficult for employees to know what's expected -- which makes it difficult to get momentum in improving sales performance.
Removing metrics can be difficult. Banks are often loath to give up measures that they believe are critical. But banks can establish which metrics are critical by determining which ones get them the outcomes they want.
Knowing the desired outcome and how to measure it focuses discussions on the factors that drive performance change. If the bank wants to increase cross-selling, the metrics that count are the ones that improve cross-selling and ultimately boost revenue.
In the second part of this series, we'll look at phase two: what a bank should know, measure, and enhance to improve its cross-selling ratio.